After four somnambulant years, M&A activity heats up in state
Starting a business is fraught with stress and uncertainty, but also a sense of naïve optimism. You’ve broken free of the corporate grind and have become your own boss.
Sometimes the entrepreneurial dream comes true and a successful and enduring company is established, one that perhaps might even last for generations.
One may have similar feelings at the end of the line when they decided to sell their business. Be it for the sake of retirement, finding a new direction in life, or simply because the business isn’t raking it in any more, the reasons for selling a business can be varied.
According to BizBuySell.com, 6,703 businesses were sold across the U.S. in 2011, with 86 of those in Connecticut (25 in greater New Haven).
A good number of business owners looking to sell are those who are at or approaching retirement and ready to move on.
“I would say most of the people we talk to are looking to retire,” Peter Arentzen, managing director of Guilford’s the Whitfield Group, which specializes in businesses in the range of $300,000 to $10 million. “And also there are people who have put their life and soul into their businesses and they’re just a little burned out and want to move on to something else.”
Likewise, Jeff Swiggett, CEO of VR Business Sales’ New Haven office, says that more often than not he finds retirement issues to be the reason a small company goes up for sale.
The common first step in putting a business on the market is approaching a broker appropriate for the size of your business. Arentzen recommends potential sellers talk to at least three different brokers to make the right choice of whom to choose.
Swiggett: "What we're not seeing are retail storefronts and restaurants. That sector was hit badly in the recession."
The broker would then make a valuation to determine how much the business is actually worth, which is why the potential seller should have good financial records. It is typically recommended to have comprehensive records for the past three years of operations. But the value placed on a business can be based on more than just the finances; assets, the industry and the customer base all come into play.
“We speak to [the owners] about the nature of their business and get an understanding of it,” Swiggett says. “It’s not entirely a function of revenue and earnings. If the business has a strong base and is not so highly dependent on the owner, it is more attractive for another entity to purchase.”
The importance of the owner to the business itself can be strong, especially to a small business whose customers might have a close personal relationship with the owner. If the owner’s approach was unique enough and vital to the business operating as it does, his or her absence could have a negative impact on the value.
“If it’s all hanging on one person, the value will go down,” Arentzen says. “I had dealt with one mom-and-pop operation where nine out of ten employees were family; I really had to backpedal from that one. But for most customers, as long as the product keeps coming through the door, they’ll be fine with it.”
Timing is a big factor as well; and while the economy is starting to look up, the downturn of the past few years had many business owners holding off on selling, and in the process postponing their retirement. Arentzen says he has talked a few prospective clients out of selling during the trough of the recession, urging them to hang on until they can get a better asking price. Both Arentzen and Swiggett say transactions were occurring at about 60 percent of the pre-recession rate.
But not all businesses and industries are created equal. Aside from the properties of the businesses themselves, the state of each industry plays a big role in determining value.
On his end, Swiggett says businesses in manufacturing and health care are the ones getting the highest valuations.
Arentzen: "The easier the business is to get into, the more buyers there are."
“What we’re not seeing are retail storefronts and restaurants. That sector was hit badly in the recession, and there’s an abundance of supply,” he says. “These were always sure bets, but a lot of them were dependent on getting a lot of credit, and that’s dried up.”
However, the opposite seems to be true in Arentzen’s experience.
“The easier the business is to get into, the more buyers there are. Things like convenience stores and liquor stores,” Arentzen says. “A lot of people look at it and say, ‘I can do that.’ But a higher-tech business with more skills, there will be less getting into that because they don’t understand it.”
According to BuyBizSell’s nationwide statistics on business sales in the fourth quarter of 2011, 29 percent sold were retail businesses, while 23 percent were restaurants. Four percent were in the manufacturing sector, and 38 percent were in the service industry.
While there are and always have been buyers out there, since the recession many have been more discerning. Swiggett says VR sells between one to three businesses a month, or 12 to 15 per year. Arentzen prefers to have no more than ten on the market at any given time. And yet when it comes down to it, about 80 percent of buyers he has worked with decided not sign on the dotted line at the last minute.
“I think they realize they’re about to sign away their savings, 401(k), equity in their home, and think, ‘Gee, maybe I can just find myself a position at $50,000 a year,’” he says.
Regardless, anyone selling a business should be patient and go about managing it as he or she normally would; it could take up to a year — or sometimes substantially longer — for the business to sell.
“Everyone has a different amount of money they want to make; a buyer is going to want to pay himself back over a short time — within five to ten years,” Arentzen says.
One former business owner who sold his business last year, who agreed to speak only on condition of anonymity, waited more than a year for his property-management business to sell. He made the leap since he was approaching retirement age.
“You can get tired of doing the same thing for 30 years, even if you don’t mind working,” he says. “Life is short — and when you get to a certain age it gets shorter.”
He says many interviews were conducted with potential buyers in the earlier stages, mostly on Saturday mornings so employees (of which there were then ten) — wouldn’t suspect that the company would soon change hands.
That announcement was made after the deal was finalized. The seller says that informing staff was one of the toughest parts of the process, but he chose to emphasize the positives — how new leadership would reinvigorate the company’s operations. The seller was confident that existing relationships between employees and clients was key to company’s success, and indeed no employees lost their jobs as a result of the transaction.
“As a rule of thumb, no new business owner should change anything in the first year,” he says. “They should see how the business works and operates — just like how you don’t really know somebody until you live with them.”
The new owners were trained for about ten weeks, and they gradually assumed leadership over that time.
In the end, he had and still has no seller’s remorse.
“It is a thrill when that wire transfer hits your account, especially after years of operating a business and seeing the value of it,” he says. “I’ve been working for 43 years — and that’s a long time.”
Mark Candido, president of Quinnipiac Bank & Trust Co. in Hamden, which handles commercial and business banking, says the bank mostly gets involved in the sale of a business when a prospective buyer comes along asking for a loan with a signed contract in hand. However, sometimes the bank might “play matchmaker” if it learns of a compatible buyer and seller.
Typically the size of a bank loan is a function of the size of the company to be acquired, as well as its assets. If buying a building, Candido says the bank usually looks for the buyer to be able to pay 25 to 30 percent down.
“But if you qualify for an SBA [U.S. Small Business Administration] loan, it’s possible you could buy that business for ten percent down,” Candido explains. “That’s terrific, because it helps people accomplish their dream of buying a business.”
He echoes the advice that one should have accurate and comprehensive financial records for the past three years when preparing to sell or buy a business.
For the time being, it appears, the environment for doing deals is looking up. Nevertheless, plenty of potential deal-makers are being cautious.
“None of the sellers trust the potential buyers right now,” Arentzen says. “They’re very discerning, and often want all their money up front.”
“It is beginning to change,” Swiggett says. “We’re talking to more sellers who just weren’t talking a few years ago. They’re seeing it as a good time to sell. Maybe they’re in their mid-60s and have been delaying it for a few years, but now’s the time. 2013 could be a good year for business sellers.”
